A Bankruptcy Court's Constitutional Ability to Enter Final Orders on Claims for Alleged Violation of Wisconsin Confidentiality Law

James M. Lawniczak considers, though the prism of a Seventh Circuit decision, the jurisdictional questions engendered by the Supreme Court's Stern v. Marshall decision. The Seventh Circuit ruled that a bankruptcy court does not have the constitutional power to enter final orders on claims that a creditor violated state confidentiality law. It further suggested in dictum that such claims may not fall within the court's related-to jurisdiction.

Excerpt:

The decision in Ortiz v. Aurora Health Care, Inc., 665 F.3d 906 (7th Cir. Dec. 30, 2011) [an enhanced version of this opinion is available to lexis.com subscribers], is one of a series of many recent bankruptcy cases that have carefully considered those types of situations where an Article I bankruptcy judge can constitutionally enter final orders. These cases have come on the heels of Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (June 23, 2011), where the Supreme Court held that a bankruptcy court cannot finally adjudicate a counterclaim filed by a debtor against a creditor who had filed a proof of claim in the bankruptcy case, even though Congress had expressly given the bankruptcy court power to do so.

The Facts of the Ortiz Case

In Ortiz, the defendant Aurora Health Care, Inc. ("Aurora") was a provider of medical services in Wisconsin. Over a five-year period, Aurora had filed approximately 3,200 proofs of claim in bankruptcy cases in the Eastern District of Wisconsin that allegedly made public medical treatment information about the debtors against whom the claims were filed. 665 F.3d at 908. This led to two class action lawsuits being filed against Aurora, one by the Ortiz plaintiffs in the bankruptcy court and a second in Wisconsin state court by a separate group of plaintiffs (the "Bembenek plaintiffs"). Each group based the claims on Wisconsin statutory law that gives individuals a cause of action when their health care information is disclosed without their permission. Id. (citing Wis. Stat. § 146.82-84). Aurora removed the Bembenek plaintiffs' complaint to the bankruptcy court. 28 U.S.C. § 1452 [an annotated version of this statute is available to lexis.com subscribers] .

The Ortiz plaintiffs asked the bankruptcy court to abstain from hearing the case they had brought in bankruptcy court, while the Bembenek plaintiffs sought remand to the state court, which would, in either case, have allowed a Wisconsin state court to resolve the issue of liability under Wisconsin law. 665 F.3d at 909. Aurora sought to have the cases removed to the district court for decision as provided for in 28 U.S.C. § 157(d) [annotated version]. Id. Both sets of motions were denied, the plaintiffs' by the bankruptcy court and Aurora's by the district court, in each case on the basis that the bankruptcy court had "core" jurisdiction over the cases, as more fully discussed below. 665 F.3d at 909-10.

The bankruptcy court then proceeded to grant summary judgment to Aurora dismissing the complaints, finding that plaintiffs had not established in the record that they had suffered any actual damage. Ortiz v. Aurora Health Care, Inc. (In re Ortiz), 430 B.R. 523, 534-35 (Bankr. E.D. Wis. 2011). Both the plaintiffs and Aurora joined in a motion to allow a direct appeal to the court of appeals under 28 U.S.C. § 157(d)(2), which both the bankruptcy court and a panel of the Seventh Circuit approved, thus bringing the matter before the court of appeals. 665 F.3d at 910.

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